Dowey said that the recent trouble emanating from the world’s most populous country stems from the link between its currency and the US dollar.
“The current volatility in global markets has precisely the same cause as had the major bout of volatility last August. As the Chinese RMB is pegged to the US dollar, US monetary policy gets exported to China,” he said.
“This means that a strong US economy and a weak Chinese economy give rise to a tug of war at the centre of the global financial system. However, I believe the market’s gloom and doom is over the top. This is because the policy solutions are simple, feasible and being executed by the US and Chinese authorities. They are threefold and work best in combination,” Dowey said.
The first thing that should happen in Dowey’s view is for the Fed must tread cautiously, releasing hawkish communication only when capital flows out of China are ‘relatively becalmed’. He cited what the Fed did last September in deciding against raising interest rates as an example.
The second thing is for China to use fiscal policy to adjust domestic demand conditions to a strong exchange rate. This is already underway, he noted.
